Fantastic unrealism
The 2027 budget proposal projects a small primary surplus equivalent to 0.1% of GDP. In addition to falling far short of what is required to place debt on a stabilization path, the government’s estimate depends on an accelerated increase in revenues while economic activity weakens. The revenue projection relies on the boost from consumption taxes, in line with what was defined in the tax reform, but risks related to oil prices remain high. On the expenditure side, there are indications that social security spending and BPC, in particular, are underestimated. Overall, the budget proposal confirms the current government’s inability to move toward fiscal consolidation.
The budget proposal (PLOA) sent to Congress last week forecasts a BRL 18.6 billion primary surplus in 2027, equivalent to 0.1% of GDP. Despite the improvement relative to 2026, which should record a 0.5% of GDP primary deficit, the PLOA has two fundamental problems. First, the pace of adjustment is insufficient, since the country needs total consolidation of at least 2.5% of GDP to stabilize debt, even under optimistic assumptions. Second, and more important, the projected primary balance is far from realistic.
The government’s proposal assumes 2.5% GDP growth next year, well above the market consensus, currently at 1.5% and on a downward path. Under the PLOA parameters, net revenue would reach 19.3% of GDP in 2027, a result surpassed only by 2010, when tax collection was boosted by extraordinary pre-salt resources.
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